Lou Thomas

Job Numbers Don't Freak Out Dollar Bulls

Data was "quite bad, but not terribly bad." Just bad enough, then. Is that what we mean these days by the Goldilocks economy?

This column doestn't tell us a lot that we couldn't have read from the charts, but it does provide a nice little irritating grain of sand around which we unwashed folks can post our little pearls of wisdom.

Some of the other posters have opined that deflation might be the reason that the dollar is up vs. the Euro. Certainly, when you wipe out huge amounts of financial paper through write-downs and deleveraging, you reduce the number of dollars in circulation.

But consider that there is over $6 trillion in cumulative trade surplus waiting to rush in to fill that hole by buying up our businesses for a fraction of their earlier values. Did you notice that there are now 26 Sovereign Wealth Funds with over $2 trillion in dollars waiting to roll into the U.S. with their carpetbags? The IMF tried to get them to subscribe to a voluntary code of behavior last week, and they said, "OK, so long as there is no transparency and no enforcement mechanism." They are getting ready to put those dollars back into circulation.

With the U.S. consumer tapped out, there is less incentive for these export-oriented nations to continue to prop up the dollar so that they can sell to the U.S. Maybe if Europe is in better (not good, just better) shape they will buy some Eurozone treasuries to prop up the Euro so that they can start selling more there. And, of course, they will start to grow their middle classes, but that could take a few years to accomplish.

When the SWFs get here with their big empty shopping bags, will there be enough desirable businesses to consume all of those foreign-held greenbacks, given the cratering of the stock market and the U.S. economy? Already, we see Lehman walking around with its hat in its hand, sipping on a bottle of low cost gin and hallucinating contributors out of the shadows. Financials have been a rather harsh experience for foreign investors. If they don't get something more to their liking, how long will it be before those dollars find their way onto the forex markets to obtain the currencies of other nations that still have something to export? Then where will the dollar be going?

And let's not forget about *dis*-investment. The market is tanking. Fannie and Freddie are tanking. Oops - breaking news - U.S. is assuming Fannie and Freddie's debt - which makes me wonder: will the U.S. Treasury be able to retain the AAA rating on its bonds? Just one of those vile thoughts that sneaks in when everything is going to seed (and that's a euphemism).

Yes, the Euro has problems, but nothing like those of the U.S. The dollar is heading down. I live in the U.S., but still with all of our aggressive, illegal invasions, its hard to complain about this present turn of events. Hope that we can patch things together eventually and become a kinder, gentler place that only invades other nations, say, every twenty years or so. Here's a wild thought: make them save up the money in advance *before* they can have a war. *That* should keep things relatively peaceful. We U.S. citizens need to work on developing a sense of shame and disgust; this is my little contribution to that project.

Forex Wrapup: Dollar Benefits As Traders Focus on Weak Economies Elsewhere

Aceman, your comment turns everything upside down.

First of all, as I mentioned, as recently as July 30th Grace opined that the dollar rally was likely to stall just as it really took off, so based upon what should we watch her for further news?

Secondly, as everyone knows and agrees, if Trichet continues to increase interest rates, that favors the Euro and puts downward pressure on the USD, not the other way around as you have stated.

Thirdly, yes, the European economy would be able to export more if the dollar is stronger, so I agree with you there, although of course a stronger dollar means that the U.S. can continue to run a deficit better, which feeds inflation in Europe, and that is an offsetting concern that may make the ECB, whose mission is to control inflation, take a hard line on interest rates.

Finally, the more inflation China has the less inclined it will be to continue supporting the dollar, which is the most important single thing that has kept the dollar afloat at all for so long - so Chinese inflation is not good for the dollar. One could argue that the present decline of commodity prices helps to *reduce* Chinese inflation, and therefore gives them more room to support their exports to the U.S. by supporting the USD, and that would be a reasonable argument, but you seem to have said the opposite.

And, the U.S. does not really benefit from a rising dollar, because as the world's largest debtor nation, the less its currency is worth, the lower the value of its outstanding debts to others. Inflation always favors debtors, although of course if they have to borrow more the cost of borrowing will go up.

A Closer Look at the Dollar Rally

Here is some additional evidence that there is direct intervention (possibly by the ECB and the Swiss Central Bank), I found a very interesting article here (go to this page and then click on "Mystery Solved"):

goldmoney.com/en/comme...

"When central banks intervene in the currency markets, they exchange their currency for dollars. Central banks then use the dollars they acquire to buy US government debt instruments so that they can earn interest on their money. The debt instruments central banks acquire are held in custody for them at the Federal Reserve, which reports this amount weekly.

"On July 16, 2008 (the closest date of the weekly reports to the July 15th low in the Dollar Index), the Federal Reserve reported holding $2,349 billion of US government paper in custody for central banks. In its report released today, this amount had grown over the past three weeks to $2,401 billion, a 38.4% annual rate of growth. To put this phenomenally high growth rate into perspective, for the twelve months ending this past July 16th, assets in the Federal Reserve's custody account grew by 17.3%, which is less than one-half the growth rate experienced over the past three weeks."

That is $650 billion in just three weeks. To give an idea of how much money this is, I think it is about 4.4 percent of the GDP for the entire Eurozone. One would have to think that intervention at those levels is not sustainable. Rather, it is probably an attempt to batten down the hatches by wringing out speculative bets vs. the dollar in preparation for the inevitable continued eruption of very, very bad economic news from the U.S. The goal would probably be to prevent a disorderly decline of the U.S. currency.

A Closer Look at the Dollar Rally

Please ignore part of my post regarding the ruble. The ruble is actually down vs. the dollar, not up. There was (still is) a charting anomaly that inverted the chart for RUBUSD=X.

The main thrust of the post, regarding currency intervention supporting the U.S. dollar, is not affected by this correction. --LT

A Closer Look at the Dollar Rally

Actually, the chart is also interesting when viewed with FROM: equal to 8/1/2008.

A Closer Look at the Dollar Rally

OK, I had a little time to look at the charts of currencies for the G8 (Eurozone obviously lumped into EUR).

Here is the chart (you have to change the FROM: date at the bottom to 6/1/2008 to get a good view, as the Ruble's
re-valuation otherwise messes it up):

tinyurl.com/6c3fzg

As can be seen, not only the Euro, but also the Swiss Franc (CHF), the Japanese Yen (JPY), the Canadian Dollar (CAD) and the British Pound (GBP) have all fallen off dramatically vs. the dollar since August 1st.

So, the claim that this is due to Euro weakness rather than to support for the dollar cannot be, well, supported.

Interestingly, the yuan (CNY) has remained pretty much level with USD.

Even more interesting, the Russian ruble (RUB) has shot dramatically *up* vs. USD.

So, I get the impression that there is a support operation going on for the dollar. China is already supporting it and probably did not want to do more at this point. Russia probably did not want to get on board because of its strong antipathy to the U.S., which has tried to build a first strike capability against it in Eastern Europe, and may have instigated the recent brush-up with Georgia. But the European and Swiss Central Banks, which has swap lines already set up with the Fed that perhaps were the instruments of this (hypothetical) support, seem to have done more than their share. Canada is more resource based, so given the central bank support from ECB and the Swiss, may have fallen just because of its commodity dependence - or maybe it actively helped, too. As for Japan, they've been supporting for a long time via the carry trade, but now carry is down somewhat due to the volatility in the forex, which makes those trades more risky (which by the way does not indicate much confidence that the recent USD moves will continue monotonically, or stabilize, either). But they do have problems of their own, in part from having supported the carry trade for so long. So, maybe the Japanese decline vs. USD is just a knock-on effect of ECB and Swiss pro-USD intervention, combined with JPY weakness.

Well, that is very "speculative" (no play upon words intended or taken), but what seems certain is that we are seeing the dollar moving up rather than the Euro moving down due to Eurozone weakness. If the Euro and CHF are moving down somewhat more than the Yen or the yuan, it is probably because those are the banks most actively intervening on behalf of USD.

A Closer Look at the Dollar Rally

OK, here are the stats for balance of payments from the IMF WEO data (as of April, 2008):

Eurozone:

tinyurl.com/6626nr

So, OK, yes, the balance of payments is slightly negative and getting slightly more negative.
As a percent of GDP for Eurozone it went from -0.246% to -0.723%, 2007-2008, slightly above noise level.


Now, here is the U.S.:

tinyurl.com/63fg8m

The balance of payments is hugely negative, but it is true it is getting less negative.
As a percent of GDP it went from -5.335 to -4.330, 2007-2008, which is a significant reduction.

As an aside, you might want to consider that the U.S. GDP is bloated with useless military spending,
which is not true of the Eurozone, and so if one were to consider the GDP without this useless
spending, the percentage of trade deficit would be even higher than it is (not sure how it would
affect the trend). Why mention this? Because the military budget is funded by deficit spending, and
so could be arbitrarily high, which makes the economy seem arbitrarily large, and so could substantially
dilute a truly enormous trade deficit in an artificially large GDP. I don't know about you, but
if one half of a nation's economic activity amounts to borrowing money and burning it in a hole on the
lawn of the White House (if only military spending were so harmless), I'd certainly think that the real
size of its real economy was not as large as GDP would indicate, and would evaluate the significance of
its deficit accordingly. For example, the ability of the U.S. to export its way out of a deficit might not be increased by the tonnage of explosives that it stockpiles and/or drops on the heads of other people.

Whatever you may think of that argument, it must be admitted that the U.S. deficit is even nominally speaking six times that of the Eurozone as a percentage of GDP.

Note that these figures are the annual amounts, not the cumulative amounts.

According to the April, 2008 IMF WEO report, the "sustainable" level of a trade deficit is somewhere between 2 and 3 percent of GDP. Eurozone is obviously way under that level. U.S., on the other hand, is way above it. So, by that logic, the dollar's exchange rate would have to fall (at least vs. its major trading partners) by quite a bit more than it has in the last year.

If you figure that in the past year (April 2007 to April 2008) the deficit declined as a percent of GDP by
about one percent, and during that same interval, the dollar declined by about 12.5 percent vs. the Euro,
and consider that the dollar has at least another 1.3 percent to go to reach the IMF's "sustainable" level, one might think that it still had some distance to fall. Of course, maybe most of the fall will be vs. the yuan and not vs. the Euro. But if the U.S. economy is tanking, and China can't sell to U.S. anymore, and allows its currency to appreciate vs. the dollar (as it has been), where is China going to put those dollars that it has accumulated and is no longer using to buy treasury bonds to prop up the dollar? They can't absorb their present productive capacity internally yet, so they will have to sell more to Eurozone, and will probably start to prop up the Euro and sell to European consumers, and invest in European bonds and so on. Some, of course, will go to buy whatever is available for purchase in the U.S. via China's Sovereign Wealth acquisitions. Eventually, dollars will have to end up on the forex being converted into other currencies of nations that have some moveable goods.

Beyond the annual balance of payments deficit, there is a cumulative deficit of perhaps $7 Trillion dollars out there already as claims against the U.S. Certainly, that must be considered a liability. I don't know what the cumulative Eurozone deficit is, but I have to think about zero or even positive given the tiny present annual increments and even smaller earlier annual increments.

I think that implicit in those who think this recent dollar appreciation is real is the idea that all of the bad stuff about the U.S. has already been priced into the dollar. I don't believe it. The U.S. is still depending upon the "kindness of strangers," but those strangers are getting less enthused as the U.S. becomes less of a consumer and more of a simple dead weight.


Oh, and I'm not sure where you get the idea that "It's not so much dollar strength you're seeing as much as the euro losing value relative to other currencies...." According to this article,
"Strong U.S. Dollar Lone Holdout Against Well-Bid Euro," the Euro is rising against most other currencies.
Haven't actually check the charts, though - am I wrong about that?

www.economicnews.ca/ce...

Running out of time, but that's what I've got right now.

Forex Wrapup: Dollar Benefits As Traders Focus on Weak Economies Elsewhere

"Weak US economy to pull the dollar down? That’s an old story."

It's not "old;" it's a magazine story that is being serialized in installments. Wait for the next one, coming quite soon. The suspense is in wondering what it will be? Fannie insolvency? Freddie insolvency? Housing values? Consumer spending? More writedowns beyond subprime in Alt-A, credit card debt (up $15 billion in July), auto loans, student loans? Hundreds of new bank insolvencies, leading the FDIC to appeal to the government for a bailout (it had only 53 billion, and Indymac alone took about 23 billion up front, all of which but 4-8 billion will be recovered, but not for 6 years or so, so they could easily run out). Stock values as consumers shut their wallets? Credit double crunch as the U.S. government pumps hundreds of billions into the deflating housing bubble by bailing out the GSEs and maybe the FDIC, and has to issue more treasuries at very high interest rates to fund those bailouts? Flight of foreign capital from GSE bonds and treasuries?

It's like waiting for the other shoe to drop when your upstairs neighbor is a centipede. Yeah, it's "old" like Europe is so "old world" and dried up, as Bush tried to claim. We only like "new" stories here, because here in the good old USA we have no historical memory. If something has already happened, then, as the song goes, "I said it once - whyyyy say it again?!"

I'm truly shocked that you could attempt to offset all of the above with some vague words about rate expectations changing. Based upon misreading Trichet's raised right eyebrow - how prophetic. Do you think that these interest rate changes rule the economic world?

And what in the Eurozone compares with the above? U.S. problems are orders of magnitude greater than those of the Eurozone.

Sorry - the dollar increase is an anomaly. You yourself predicted that the dollar's rise would not continue on July 30th, in your article "Dollar Rally Likely to Stall." This present article shows that you have no foundation in analysis - your articles are blown about by the winds of exchange rates, and your feet no longer connect with the ground.

King Dollar Roars Back

This article just presents data that we already know about the dollar's recent gains and then pastes a big, smiley face of a headline on as the title.

Since, from an anthropological standpoint, I find this behavior fascinating, I decided to look at this author's other recent articles. Here is a sample:

# King Dollar Roars Back

# Adjusted for Growth in the US Labor Force, July's Jobless Claims Are Below Average

# Economic Stimulus Package Boosts Real Disposable Income

# U.S. Oil Production Today Same as in 1948

# Second Quarter Homeownership Rate Has Largest Increase in Four Years

# There's Been Major Deflation for Some Products

And, possibly my favorite:

# Putting $1T Subprime Mortgage Losses in Perspective


This guy must sit in front of his computer all day with headphones on and Bobby McFerrin's famous mantra on infinite repeat.

A Closer Look at the Dollar Rally

I have to agree with those who said that this is a purely technical analysis when fundamentals are so dramatically opposed to dollar appreciation. The blather about other economies being in worse shape than the U.S. - how can anyone with a thought in their heads say that? Is the Eurozone running an enormous trade deficit? Has the Eurozone cored out its industry through offshoring (not unrelated to the deficit issue)? Is the Eurozone running up enormous, unsustainable budget deficits? Is the Eurozone at war around the world far beyond its economic capacity? Is the Eurozone sitting on a housing credit bubble that threatens the entire economy?

Sure, there are a few problems in Spain with the housing market, but those bonds are covered bonds which are regulated to have much higher loan to value ratios and which are based upon loans that have not been lent out to paupers. Sure, there are European banks that got into the subprime party and now have big hangovers, but those are knock-on effects from the much larger U.S. disaster.

The Eurozone consumes more than half of its own production. It has other markets for its goods besides the U.S.

So, why has the dollar skyrocketed in the last few weeks, and especially in the last few days. I surely don't know, but here is my theory. With the U.S. economy getting hit with one historic body blow after another (most recently the technical insolvency or near-insolvency of the two main remaining supports for the mortgage bubble), central banks concerned about the possibility of a total run on the dollar have decided to wring out as much of the speculative downside bets vs. the dollar as they can, forcing those shorting the dollar to cover their betts, thereby raising the dollar up on the very scaffold that was intended to hang it. I think that they've used targeted intervention to accomplish that end.

I suspect that this is their way of battening down the hatches for the remaining economic disasters yet to befall the U.S. They also hope to scare U.S. investors who have fled the dollar (who are not speculators) back into the dollar fold.

Nobody wants a disorderly dollar decline, and I think that it is concern about such a disorderly decline that has caused the central banks to intervene.

Naturally, when I see the dollar roaring upward the way it has, it makes me question my own theories, if not my sanity, but it makes no sense at all based upon fundamentals, so then, what is it, if not intervention? Somebody tell me; I would really like to know.

Dollar Wins on Euro, Pound Weakness

Fascinating discussion--especially the comments of JasonC. I'm still trying to make sense of this, but here are a few questions and observations:

shadowstats.com's alternate data series shows a continuation of the suppressed M3 figure, and that has indeed fallen off somewhat in the last few months, although overall the trend is *hugely* upward. My thoughts on this would be that it reflects the destruction of balance sheet and now even some off-balance-sheet CDOs, etc., that are being marked to market instead of to model at last. Note the National Australian Bank having written down to zero over $1 billion of such junk, all based on U.S. mortgages, and Merrill Lynch's subsequent writedown of billions of its own such assets to 22 cents on the dollar (see smirkingchimp.com/thre...).

Such admissions should be reflected as a reduction of the money supply, right? Deflation and deleveraging will, in fact, reduce the money supply, all other things being equal.

Of course, the Fed has been backfilling this furiously by lending out treasuries to troubled institutions in exchange for their CDO junk. And that's where I have to ask JasonC: Won't these treasuries, and the ones that the Fed has sold, be used for additional money creation on margin that the CDO junk could not (any longer) be used for?

So, we do have destruction of wealth, and hence money supply, but we also have some re-flation from the Fed, and now from the Federal government with the $300 billion credit line it recently extended to Fannie and Freddie. So, we have a collapsing bubble and desperate attempts of various windbags to breath new life into it.

Considering, though, that this bubble is tied to major asset classes that have been supported by foreign investment, how long will it be before those foreign investors flee en masses from U.S. equities, Treasuries, Fannie and Freddie bonds, etc.? And where will the $7 trillion in cumulative U.S. trade deficit end up, if not in Sovereign Wealth Funds buying up whatever is not nailed down here, and then on to the forex markets to get less degraded fiat currencies, at the expense of the USD?

The export-oriented Asian economies supported the dollar only so long as the U.S. market for their goods was strong. A recression here means less incentive to prop up the dollar, and more incentive to prop up the Euro and to sell more to the Euozone instead.

Anyway, intuitively, you have to ask yourself: how can a collapse of the U.S. economy be good for the dollar?

So, why is the dollar holding its own against the Euro for the last few months? I cannot see any explanation other than active intervention by central banks terrified that the dollar will collapse in an uncontrolled manner. The worse the U.S. news, the better the dollar gets.

As I said, still haven't figured this one out...but there are plenty of other shoes to drop on this centipede of an economic calamity, and eventually one of them is going to hit the dollar right in the middle of the forehead.

Near-Term Dollar Rally Possible As Fed's Plosser Voices Rate Hike Urgency

It is astonishing that anyone would take the Fed's feints in the direction of a rate hike seriously, after all that has occurred. The game is so over now that even the principals can hardly bring themselves to mutter out their lines. How brave of you to continue to write about it as if it really mattered.

Euro Shakeup: Trichet Hints at Raising Rates

This column is too obvious. We need more analysis.